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How worried should we be about the stock market wobble?

The key concerns for the week ahead

WT24 Desk

How worried should we be about the stock market wobble?

Major stock markets last week suffered their worst spell since the December carnage, as investors grew nervous about the health of the global economy. Was this just a slight wobble in the recovery or a sign of renewed trouble?

The FTSE All-World ended the week with a 1.3 per cent loss, its biggest five-day decline since late December, when the global equities benchmark tumbled 5.7 per cent.

Since then stocks have enjoyed their best start to a year in almost three decades, but many investors and analysts remain concerned that December’s volatility could return. Global data has been disappointing lately, with all of Citi’s “economic surprise” indices — which measure how data comes in relative to expectation — in deeply negative territory.

The OECD and the European Central Bank underscored the economic worries last week, with the former cutting its forecasts for almost every major global economy and the latter unexpectedly unveiling fresh stimulus due to “continued weakness and pervasive uncertainty”. A limp week was then capped by a huge miss in US job creation. Robin Wigglesworth.

Is Mizuho’s $6bn restructuring hit a bad omen for Japanese banks? Mizuho’s shock announcement of ¥680bn ($6.1bn) in impairments last week was undoubtedly grim for Japan’s second-biggest bank. But the market is still wrestling with the question of whether this is a one-off disease or an epidemic that threatens the sector.

Mizuho’s problems are twofold. The larger of the huge downward revisions relates to impairment losses on retail branches. It is an admission that the lender’s home market is shrinking, and that large parts of Japan are uneconomic for its business as it begins scaling back its huge domestic network.

All the big banks share those problems. However, they have been rather quicker off the mark in dealing with them. Also, within Mizhuo’s ¥500bn impairment loss on its fixed assets, 92 per cent of it is related to a problem with a software system.

A more alarming issue, though, arises from the ¥180bn of losses on restructuring its securities portfolio at market-related operations — the majority of which came from overseas bonds. Japanese banks have been flocking overseas for yield since 2013 as the Bank of Japan embarked on an ultra-aggressive course of monetary easing.

The three Japanese megabanks held more than ¥35tn of foreign bonds at the end of 2018 and have been buying at a record pace in the first eight weeks of this year.

Leo Lewis Is it time for sterling buyers to emerge from the sidelines?

Some hedge funds seem to think so.

UK markets are heading for yet another crucial week, with Prime Minister Theresa May presenting her Brexit plans to MPs for a second time, and a separate parliamentary vote on whether to extend the deadline on the UK’s exit from the EU.

Bank of America Merrill Lynch, among other banks, is advising its clients that the UK government “has effectively taken no-deal off the table”, establishing a bedrock of support for sterling.

Hedge funds have already become buyers of the UK currency this year, the US bank said, helping the pound to become one of the best performing major currencies in the world so far this year. Sterling has clocked up a 2.5 per cent gain against the dollar since the turn of the year, trading most recently just under $1.31, and is nearly 5 per cent higher against the euro, leaving one euro buying about 86.3p.

Other banks have also turned positive on the currency. Morgan Stanley is now arguing that the pound will rise to $1.36 against the dollar, while RBC Capital Markets is estimating that sterling will shove the euro to 84.2p.

Eva Szalay Has the euro really started sliding?

It seems so, yes. Last week, the European Central Bank pulled the rug from under the currency. Alongside its latest decision on interest rates, which were unchanged, the central bank launched a new programme of cheap loans for eurozone banks, months earlier than many market-watchers had expected. The package, known by the unlovely moniker of TLTRO III, is part of an effort to prop up an ailing eurozone economy.

Shortly afterwards, ECB’s president Mario Draghi took to the stage for his regular statement, with sharply lower growth and inflation forecasts. “The fact that the climate has become more uncertain doesn’t mean that one has to stay put. In a dark room you move with tiny steps,” he added. “You don’t run but you do move.”

The euro certainly moved, shedding around a cent against the US dollar — a large shift for an exchange rate that has gone the best part of nowhere for several months — to trade briefly under $1.12. The following day brought no reversal. This has all helped to push the dollar index to its highest levels in two years. Investment banks are now busily ripping up their forecasts for any rises in ECB benchmark interest rates for the foreseeable future, and some are cutting their exchange-rate forecasts too.

One potential limit on the euro’s ability to keep falling from here is the similar pressure on other central banks. “We do not think [selling the euro against the dollar] is the cleanest expression of our bearish macro view on the eurozone,” wrote analysts at BNP Paribas. “This is because if there is a race to the bottom by G10 central banks, the Fed has by far the most room to cut rates.” Katie Martin. Source: Financial Times

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